While illegitimate and high profits
kept the banks afloat during the global financial crisis of 2007-08, the leasing
companies in Pakistan succumbed to the onslaught; the reason being the uneven
playing field and sharp reversal of SBP benchmark rate that choked the flow of
business funds to the leasing companies.

The leasing sector is in the throes of
death and that doesn't sound very decent as we have been so brazenly bragging
about the so-called strength of our financial sector, particularly the banking
segment.

Leasing sector has played an important
role in boosting the country's capital formation, and is still capable of
reviving its glorious past if treated at par with the banking sector.

The leasing business in Pakistan, after
witnessing an early boom period, has gone into deep recession. The operator base
has shrunk drastically and an almost unmanageable liquidity crisis has ensued
from the choked flow of new investment funds.

The exceptionally high policy rate
regime extending over the last three years has taken a heavy toll on the leasing
sector. Capping it all was the 2007-08 global financial crisis that drained the
Pakistani banks and the money market of liquidity so vital for the survival of
leasing business.

Presently, the leasing sector is
struggling as it is threatened by the perennial resource mobilization problem.
Unlike banks, it has no access to the low cost customer deposits and has to
procure business funds from open market, which, besides charging higher rates,
also takes into account the credit rating of a particular leasing company.
Acceptance of public deposits through COIs (certificates of investment) is also
contingent upon a good credit rating, in the absence of which the SECP suspends
the right to accept such deposits. During the falling interest rate era too, the
leasing companies could not enjoy a free, sustained flow of low-cost business
funds. In the rising rate regime that followed, the problem was compounded.
Though the banks never assumed an explicitly competitive posture against the
leasing companies, yet the fact remains that in the absence of an even playing
field, the leasing companies always find themselves in a state of implicit
competition. The floating rate borrowing and lending also pose maturity-mismatch
problems for the leasing companies.

With the phasing out of country's high
profile development financial institutions (DFIs), the leasing and modaraba
sectors stepped in with a mandate to act as financial sector intermediaries.
With the advent of leasing sector, the business and industry circles were
introduced to a new financial culture with a sharp focus on the country's
capital formation needs and a will to act as swiftly as possible. This was in
sharp contrast to banks' traditionally slow and over-refined lending procedures.

Blessed with an enormous business
network and numerous business options, banks allowed the leasing and modaraba
sectors to develop without subjecting them to any serious competition pressures.
Some of the modarabas were also allowed to do leasing business, albeit strictly
in line with the Shariah-compliant regulations. Driven by the urge to improve
profitability and growth, the leasing companies shifted the focus from
large-ticket industrial leases to small-size consumer lease financing. Large
size industrial leases, besides posing risk concentration threat, entailed
foreclosure and disposal problems in case of a default. An erected industrial
plant at borrower's site is not only cumbersome and costly to remove but also
difficult to dispose off at a price that guarantees 100 per cent loan recovery.
On the other hand, the moveable assets like vehicles, equipments, appliances
etc. are not only easy to repossess but are most likely to fetch a
full-loan-liquidation price.

The changed scenario has not only put a
big question mark on leasing sector's survival but has also undermined country's
industrial growth. How the global financial crisis and monetary and fiscal
policy failures have wreaked havoc with the leasing sector during the last three
years, can be understood from the following key financial indicators of a
leasing company having an asset base of more than Rs5 billion three years back:

KEY FINANCIAL INDICATORS OF A LEASING COMPANY
(RS '000 YEAREND JUNE)

INDICATOR

2010

2009

2008

2007

2006

2005

Total Assets

2,749,705

3,966,829

5,577,274

5,352,516

4,770,553

3,647,523

Total Liabilities

2,668,937

3,727,834

4,961,129

4,832,031

4,364,808

3,284,847

Net Worth

80,768

238,995

592,369

517,326

390,539

346,670

Shareholders' Fund

438,028

438,027

475,500

513,000

392,000

315,000

Reserves

(384,454)

(111,728)

244840

42,593

87,440

85,769

Borrowings

1,749,185

2,378,326

2,923,907

3,139,950

2,517,885

2,090,253

COIs

-

110,200

562,100

443,448

910,100

598,100

Net Investment in Leases

1,868,785

2,759,686

4,003,830

4,026,373

3,327,281

2,260,342

After-tax Profit

(273,954)

(357,796)

211,810

40,258

108,021

74,281

Mkt-Price of Rs10 share

2.84

1.98

6.89

10.95

15.40

17.50

(Source: Company's Annual
Report 2010)

Leasing companies have felt the
pressure of monetary and fiscal policy deficit. On monetary front, the highest
bank rate in the region, ups their funds cost to an unmanageable level.
Government reliance on SBP and commercial bank borrowings gives our banks a
reason to avoid private sector lending on the false pretexts of better risk
management and asset quality improvement. In fact, it is a zero-risk lending to
the government and its affiliates that leaves the private sector in general and
the leasing sector in particular languishing in funds paucity. This situation
chains the leasing companies to a vicious circle: liquidity crunch leading to
drastically reduced margins; reduced margins leading to weak financials; weak
financials leading to poor credit rating; poor credit rating prompting SECP to
suspend leasing company's right to raise money through COIs; inability to issue
COIs leading to a more severe liquidity crunch.

According to the data released by the
erstwhile LAP, the number of operative leasing companies is shrinking
continuously due to the closures/mergers. Majority of the leasing companies is
being quoted below-par on stock exchange. The shareholders have almost forgotten
that the leasing companies used to pay dividends regularly. The paucity of funds
syndrome has enveloped the entire leasing sector, which is in need of an
immediate bailout. Its basic role of a powerful engine to provide financing
steam to the industry, especially the SME sector, needs to be rewritten.

The banks that, by virtue of their
various economies, operate at a much lower administrative cost, should not be
allowed to compete with leasing and modaraba companies in any form. The existing
fund raising instruments namely COIs and TFCs should be retailored to suit the
requirement of leasing companies. A level playing field that ensures survival of
the leasing sector is the crying need of the moment.